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ANALYSIS » How will IPOs change FERRAGAMO and PRADA ? (updated)

How will IPOs change FERRAGAMO and PRADA ? (updated)

Jun 15, 2011

Salvatore Ferragamo with Sophia Loren

The stock exchange listings of Italy’s luxury brands PRADA and SALVATORE FERRAGAMO has been making headlines for the past months, coverage intensifying as Prada’s June 23 rd announced listing approaches fast. Analysts seem unanimous in highlighting PRADA’s huge over valuation (21 times 2011 earnings) in contrast with FERRAGAMO’s more discreet move. The motives of the two companies are also very different. While Prada is looking to raise cash for its aggressive expansion plan, Ferragamo merely looks to pay out some of its numerous family shareholders (60 family members) who are eager to make an exit.

In both cases, their IPOs mark a bold move for the two family owned luxury brands, each seeking further international expansion, especially with directly operated stores, which has been the recipe for world’s leader LOUIS VUITTON. However, raising cash will not suffice and the two companies will have to make important strategic decisions, especially on leadership and organization within their own operations.

Pressured by its creditors, major Italian banks such as Mediobanca and Intesa, PRADA has had to acquiesce to demands for the expansion of its worldwide presence through directly operated stores, rather than franchising and wholesale, which had been the company’s major expansion engines for the past two decades. And the ride hasn’t been an smooth one, Prada facing major challenges in opening directly operated stores in Istanbul and Dubai, top international luxury shopping hubs. Creating or replicating a structure such as the one mastered by LOUIS VUITTON in its international expansion has proven to be much harder, some say almost impossible, at least not in such a short time span.

For more than 3 years, Prada has been virtually absent from Dubai, after the closure of its franchised store at the Burjuman Mall. Since early 2010, the company started seeking solutions for a directly controlled entry. Eventually, it has given in to what had been the ideal solution and that is a joint venture with leading regional luxury retailer Al Tayer. Then, there are also major luxury markets such as India, where Prada has been absent, while its direct competitors Louis Vuitton is opening this Fall its fourth store in India and Hermes is opening this summer its third store in India.

I strongly believe that this IPO has already created a huge expectation for PRADA, both from the point of view of media, luxury retail professionals but consumers as well. There is no day passing by without an international or local publication not to publish an article on its IPO in Hong Kong. They all seem to praise and be amazed by the valuation, however, in the mid to long term everyone is hoping this is not just a financial engineering ahead of the company’s sale.

I am also wondering what consumers might feel when reading these articles, irrespective whether they ever bought even a wallet from Prada or Ferragamo. Would they feel like the two brands have become stronger overnight and they will suddenly become better - as anyone would expect ? That is why, I reckon, Ferragamo’s move to stick with the Milan stock exchange is in a way toning down the hype and expectations. Although going for the Milan stock exchange listing versus the Hong Kong one will raise less money and be exposed to the still troubled Italian economy, the brand shows it remains deeply committed to its Italian roots, which is part of its DNA.

PRADA’s next week planned IPO on the Hong Kong Stock Exchange seems to be overshadowed not only by the over-valuation but also by Italian fiscal regulations including taxation, which might keep away wealthy Chinese investors who will be reluctant to pay 27% taxes on dividends and 12,5% taxes on value added.

Mention should also be made that this week’s similar IPO, of American luggage maker SAMSONITE was considered by most analysts as a major flop, the company losing its 11% share at the closing of its first day on the Hong Kong Stock Exchange. It is SAMSONITE’s ”KO” which made PRADA change its price guidance for its shares from US$ 36,5 – 48 to US$ 30 – 40, thus taking a more cautionary approach, yet demonstrating Prada’s lack of financial manoeuvring skills.